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Interest Rates Increased by European Central Bank ECB

The European Central Bank (ECB) is not taking it easy this summer. It just increased the interest rate, much to the chagrin of the 17 members of the euro bloc. This is the second rate increase since April and is designed to keep inflation under control.

Even the ever-growing Greek debt crisis is not enough to keep additional rate increases from occurring, says the ECB.

Jean-Claude Trichet, ECB president, announced that the private sector will not play a role in a Greek bailout resulting in default. This puts the ECB in direct opposition to the finance ministries of the Netherlands, France, and Germany.

Mr. Trichet did not directly respond to questions about whether the ECB will come to the rescue of Greek banks to prevent their collapse. Though questions related to Greece dominated the press conference, the increase of the main policy rate from 1.25 to 1.5 percent by unanimous vote was not ignored.

Risks to inflation are being monitored “very closely,” stated Mr. Trichet, indicating that another rate increase may be a few months away.

In response to the ECB move, the central bank in Denmark increased its rate by a quarter of a percent to 1.55 percent. Denmark tracks the ECB regarding rates and has a loose peg to the euro for its exchange rate. Central banks in other major markets are being more cautious, with the Bank of England keeping its policy rate at 0.5 percent despite high inflation.

The ECB is taking a risk by increasing its rates. At the same time, many doubt that the group will actually cut Greek banks out of ECB loans should a default occur. The funding, which totaled €97 billion in May alone, is something Greece depends upon and removing it would like cause the Greek economy to collapse.